Justifying the subcontracting top-slice

Colleges are increasingly at risk of being percieved to be ripping off partners by “top-slicing” 30 per cent or more in subcontracting agreements.

Although the Skills Funding Agency (SFA) does not impose a maximum percentage charged by colleges under subcontracting arrangements – its guidance states this should not exceed 15 per cent without a detailed explanation. Yet colleges including Barking and Dagenham, Blackburn, Craven College and Grimsby Institute of Further and Higher Education are listed in publically available SFA records as charging far more.

A consultant working with a training provider, who wishes to remain anonymous, told FE Week that the contracting college has informed them that they will double their management fee from 15 per cent to 30 per cent in the next academic year with no explanation as to why.

Blackburn College claims its 30 per cent fee is reflective of its costs in terms of quality assurance, provider support and calculated risks to its students, as well as the college’s risk of meeting its student number and funding targets. “Our intention in all partnership work is to build partner capacity and widen participation and we have a very good relationship with our six subcontractors,” says a spokesperson.

Other colleges contacted by FE Week that are publically listed as charging 30 per cent – and in some cases over 50 per cent – in one or more of their subcontracting arrangements either declined to comment or even denied the percentage. Hull College told FE Week that they would not release the information unless we went through the Freedom of Information act process.

Several circumstances have led to the recent increase in subcontracting. Most significant is the introduction of the £500k Minimum Contract Levels for 2011/12, meaning that several hundred providers (even after exemptions) will need to subcontract their funding or lose the ability to continue providing courses. The Department for Business, Innovation and Skills (BIS) has also been encouraging colleges to subcontract, whilst officials have been promoting it in newspapers, “in order to maximise the funding which reaches the front line.”

But there is widespread concern that the move will see a return to the stories of fraud and scandal that were rife during the 1990s. During that era, inadequate funding led many colleges – with the encouragement of their funding body, the then Further Education Funding Council (FEFC) – to enter into franchising agreements. This involved colleges subcontracting out the teaching, training and assessment of students, claiming the public funding and passing on a portion to the subcontractors.

Whilst the trend was justified as a means of widening participation and providing them with much-needed funds, the Serious Fraud Office was called in to investigate misuse of what turned out to be millions of pounds of public money. Mindful of this scandal – and that (as stated on the front page) £11m was lost to fraud or misuse in 2010-11, of which only £3m is so far accounted for – the SFA currently has plans to crack down on misuse of public money, which it admits is likely to get worse under the government’s new subcontracting arrangements.

“Levels of management fee, predominantly levelled by colleges, have often – but not always – been scandalous giving rise to its more common description of ‘top slicing’,” says Graham Hoyle, AELP’s chief executive, who says the term franchising has never recovered any positive credibility within the FE system. “The key is to approach subcontracting as a positive business mechanism, negotiated properly and thoughtfully between partners enjoying a reasonably balanced level of relative ‘power.’ It is only when one player is in an overtly more powerful position than the other that unhelpful, indeed damaging, exploitation can ensue.”

Andy Moran

One provider we worked with was charging 13.5% and we were told that the fee was going to increase to 22.5%. There was no additional services supplied for this increase. Their justification was that they had to get the same return on sub-contracting as their own direct delivery.

J Green

A balance has to be found in mitigating the risk sub-contractor presents and enabling a quality delivery by sub-contractors. If the top slice is too high the provider may not have sufficient funds to deliver a quality provision or may cut corners (risk). By charging disproportionately high management fees Colleges are partly to blame for creating the risk. How many colleges actually analyse the cost of delivery for the partner and ensuring that the share of funding paid is adequate to cover cost of delivery under due diligence.

Quality Warrior

Spot on J Green, how many colleges and private providers complete a costing exercise, not many I would have thought. How many know how to….

This type of exercise is one of the most basic management processes that when completed properly can tell if the arrangement is financially viable and doable as well as to justify sub contract top slicing, why wouldn’t a lead want to do this in any case……

Senior managers who are sometimes paid very good wages aren’t completing one of the most basic management processes in order to ascertain costs, where this is the case don’t employ them, redistribute their duties, save a huge amount of public taxpayers money and immediately you could reduce the top slice rate..simples….